Why, Where, and How Much?
When I counsel young people and young couples, I like the Dave Ramsey approach. He provides good fundamental education and advice. I do not agree with everything Mr. Ramsey says, but he provides a good starting point for living a wise financial life with a long-term goal to be generous with the resources God puts in our hands. He recommends an emergency fund. Having such a fund is not contrary to the teachings in the scriptures. LINK to DAVE RAMSEY EMERGENCY FUND IDEAS
Extreme Number One
Like most things in life, we mortals can go to extremes. One extreme is the thinking that “God will provide, so I don’t need an emergency fund.” I agree with the first half of that statement but question the wisdom and logic of the second half. For example, Solomon encourages us to “consider the ant” in Proverbs 6:6. Why consider the ant? Learn from the ant and gain wisdom. One thing an ant does is store food. So do squirrels and chipmunks. When we say “squirrel away” we mean to save for the future. So, God permitting, some of the excess should be stored for the future. Consider what Joseph did in preparing for the famine in Egypt! See Genesis chapter 41.
The Other Extreme
The other extreme tends towards being a miser. A miser is a person who is extremely stingy with money. They may be miserly because they are fearful, or greedy, or just plain stingy. “The parent of English misery, miserable, and miser is the Latin adjective miser, meaning “wretched” or “unfortunate.” The first of this family to enter the English language is misery in the 14th century. Miserable follows soon after, and then miser, circa 1500.” SOURCE: Merriam Webster Dictionary
So some will save-and-save and not ever think, “I have saved a sufficient amount to be a good steward and to care for my family.” I don’t see this often, but I have seen it. Some just cannot seem to let go of a dollar to save their life.
A Rule of Thumb
I just love idioms. “In English, the phrase rule of thumb refers to an approximate method for doing something, based on practical experience rather than theory. This usage of the phrase can be traced back to the 17th century and has been associated with various trades where quantities were measured by comparison to the width or length of a thumb.” SOURCE: Wikipedia
Dave Ramsey suggests starting with a $1,000 emergency fund. That is good advice for many of the smaller emergencies of life. However, if you are not retired, and your family depends on your employment for monthly income, then I believe at least six months of expenses is a good emergency fund. So, for example, if your monthly expenses are $2,200, then you should have $13,200 in your emergency fund. This does not mean you need to use the fund only if you are unemployed. Perhaps you need it to crown a tooth or take care of a car repair. But after doing so, the goal should be to replenish the emergency fund.
The ”Fool” has a nice calculator that is easy to use. Of course, if you know your total monthly expenses, you don’t need this link, but it was fun to try it out. LINK TO CALCULATOR
Cindie and I do not have six months of expenses in our emergency fund. However, we both are collecting Social Security. We also have monthly dividend income. I often have income from trading covered call options. Therefore, our $10,000 emergency fund is just a buffer for big surprises that need to be funded quickly.
Where to Store the Emergency Fund
There are plenty of bad places to store an emergency fund. One terrible place is your checking account. Another dumb place is under your mattress or in a home safe. There are some good choices, including savings accounts that pay a reasonable rate, various short-term CDs (The 1–3-month varieties make sense) and even some money market or government mutual funds like SPAXX, which is the Fidelity® Government Money Market Fund.
In my next edition I will explain the differences of some funds available to Fidelity Investments customers. There are reasons to like them, and reasons that you might not want them.
Full Disclosure
Cindie and I have a little more than $10,000 in an Ally online bank savings account that is currently earning 2.35%. The interest rate has been increasing monthly over the last several months. At the beginning of 2022 the interest rate was 0.50%. However, I am now considering alternatives. 2.35% is OK for a savings account, but there are other FDIC insured options with a better return.
Know Your Flocks & Herds 